Financial Markets and Institutions
Exam 2025 Questions and Answers
What factors are encouraging financial institutions to offer overlapping financial
services such as banking, investment banking, brokerage, etc.? - ....ANSWER ...-
Regulatory changes allowing institutions to offer more services
Technological improvements reducing the cost of providing financial services
Increasing competition from full-service global financial institutions
IBM creates and sells additional stock to the investment banker Morgan Stanley.
Morgan Stanley then resells the issue to the U.S. public.
This transaction is an example of a(n) - ....ANSWER ...-primary market
transaction.
A corporation seeking to sell new equity securities to the public for the first time in order
to raise cash for capital investment would most likely - ....ANSWER ...-conduct an
IPO with the assistance of an investment banker.
The largest capital market security outstanding in 2010 measured by market value was -
....ANSWER ...-corporate stocks.
Depository institutions include - ....ANSWER ...-banks and thrifts.
…FOR STUDENTS ONLY…©️2025 ALL RIGHTS RESERVED… 1
,Financial intermediaries (FIs) can offer savers a safer, more liquid investment than a
capital market security, even though the intermediary invests in risky illiquid
instruments because - ....ANSWER ...-FIs can diversify away some of their risk and
closely monitor the riskiness of their assets.
Which of the following is/are money market instrument(s)? - ....ANSWER ...-
Negotiable CDs
The Securities Exchange Commission (SEC) does - ....ANSWER ...-decide
whether a firm making a public issue has provided enough information for investors to
decide whether the issue is fairly priced.
require exchanges to monitor trading to prevent insider trading.
attempt to reduce excessive price fluctuations.
monitor the major securities exchanges.
The most diversified type of depository institutions is - ....ANSWER ...-commercial
banks.
Money markets trade securities that - ....ANSWER ...-mature in one year or less.
have little chance of loss of principal.
Which of the following are capital market instruments? - ....ANSWER ...-10-year
corporate bonds
…FOR STUDENTS ONLY…©️2025 ALL RIGHTS RESERVED… 2
,30-year mortgages
20-year Treasury bonds
15-year U.S. government agency bonds
Commercial paper is - ....ANSWER ...-a short-term unsecured promissory note
issued by a company to raise funds for a short time period.
A negotiable CD is - ....ANSWER ...-a marketable bank issued time deposit that
specifies the interest rate earned and a fixed maturity date.
You go to the Wall Street Journal and notice that yields on almost all corporate and
Treasury bonds have decreased. The yield decreases may be explained by which one of
the following? - ....ANSWER ...-A decrease in U.S. inflationary expectations
Of the following, the most likely effect of an increase in income tax rates would be to -
....ANSWER ...-decrease the savings rate.
decrease the supply of loanable funds.
increase interest rates.
An investor wants to be able to buy 4 percent more goods and services in the future in
order to induce her to invest today. During the investment period prices are expected to
rise by 2 percent. Which statement(s) below is/are true? - ....ANSWER ...-4 percent
is the desired real risk-free interest rate.
6 percent is the approximate nominal rate of interest required
…FOR STUDENTS ONLY…©️2025 ALL RIGHTS RESERVED… 3
, 2 percent is the expected inflation rate over the period.
An investor requires a 3 percent increase in purchasing power in order to induce her to
lend. She expects inflation to be 2 percent next year. The nominal rate she must charge
is about - ....ANSWER ...-5 percent.
The term structure of interest rates is upward sloping for all bond types. A certain AAA
rated non-callable 10-year corporate bond has been issued at a 6.15 percent promised
yield. Which one of the following bonds probably has a higher promised yield? -
....ANSWER ...-A callable AAA rated corporate bond with a 15-year maturity.
Which of the following bond types pays interest that is exempt from federal taxation? -
....ANSWER ...-Municipal bonds
The relationship between maturity and yield to maturity is called the
__________________. - ....ANSWER ...-term structure
Duration is - ....ANSWER ...-the weighted average time to maturity of the bond's
cash flows.
A security has an expected return less than its required return. This security is -
....ANSWER ...-selling for more than its PV.
A 10-year annual payment corporate coupon bond has an expected return of 11 percent
and a required return of 10 percent. The bond's market price is - ....ANSWER ...-
less than its PV.
Convexity arises because - ....ANSWER ...-present values are a nonlinear function
of interest rates.
The duration of a 180-day T-Bill is (in years) - ....ANSWER ...-0.493.
…FOR STUDENTS ONLY…©️2025 ALL RIGHTS RESERVED… 4
Exam 2025 Questions and Answers
What factors are encouraging financial institutions to offer overlapping financial
services such as banking, investment banking, brokerage, etc.? - ....ANSWER ...-
Regulatory changes allowing institutions to offer more services
Technological improvements reducing the cost of providing financial services
Increasing competition from full-service global financial institutions
IBM creates and sells additional stock to the investment banker Morgan Stanley.
Morgan Stanley then resells the issue to the U.S. public.
This transaction is an example of a(n) - ....ANSWER ...-primary market
transaction.
A corporation seeking to sell new equity securities to the public for the first time in order
to raise cash for capital investment would most likely - ....ANSWER ...-conduct an
IPO with the assistance of an investment banker.
The largest capital market security outstanding in 2010 measured by market value was -
....ANSWER ...-corporate stocks.
Depository institutions include - ....ANSWER ...-banks and thrifts.
…FOR STUDENTS ONLY…©️2025 ALL RIGHTS RESERVED… 1
,Financial intermediaries (FIs) can offer savers a safer, more liquid investment than a
capital market security, even though the intermediary invests in risky illiquid
instruments because - ....ANSWER ...-FIs can diversify away some of their risk and
closely monitor the riskiness of their assets.
Which of the following is/are money market instrument(s)? - ....ANSWER ...-
Negotiable CDs
The Securities Exchange Commission (SEC) does - ....ANSWER ...-decide
whether a firm making a public issue has provided enough information for investors to
decide whether the issue is fairly priced.
require exchanges to monitor trading to prevent insider trading.
attempt to reduce excessive price fluctuations.
monitor the major securities exchanges.
The most diversified type of depository institutions is - ....ANSWER ...-commercial
banks.
Money markets trade securities that - ....ANSWER ...-mature in one year or less.
have little chance of loss of principal.
Which of the following are capital market instruments? - ....ANSWER ...-10-year
corporate bonds
…FOR STUDENTS ONLY…©️2025 ALL RIGHTS RESERVED… 2
,30-year mortgages
20-year Treasury bonds
15-year U.S. government agency bonds
Commercial paper is - ....ANSWER ...-a short-term unsecured promissory note
issued by a company to raise funds for a short time period.
A negotiable CD is - ....ANSWER ...-a marketable bank issued time deposit that
specifies the interest rate earned and a fixed maturity date.
You go to the Wall Street Journal and notice that yields on almost all corporate and
Treasury bonds have decreased. The yield decreases may be explained by which one of
the following? - ....ANSWER ...-A decrease in U.S. inflationary expectations
Of the following, the most likely effect of an increase in income tax rates would be to -
....ANSWER ...-decrease the savings rate.
decrease the supply of loanable funds.
increase interest rates.
An investor wants to be able to buy 4 percent more goods and services in the future in
order to induce her to invest today. During the investment period prices are expected to
rise by 2 percent. Which statement(s) below is/are true? - ....ANSWER ...-4 percent
is the desired real risk-free interest rate.
6 percent is the approximate nominal rate of interest required
…FOR STUDENTS ONLY…©️2025 ALL RIGHTS RESERVED… 3
, 2 percent is the expected inflation rate over the period.
An investor requires a 3 percent increase in purchasing power in order to induce her to
lend. She expects inflation to be 2 percent next year. The nominal rate she must charge
is about - ....ANSWER ...-5 percent.
The term structure of interest rates is upward sloping for all bond types. A certain AAA
rated non-callable 10-year corporate bond has been issued at a 6.15 percent promised
yield. Which one of the following bonds probably has a higher promised yield? -
....ANSWER ...-A callable AAA rated corporate bond with a 15-year maturity.
Which of the following bond types pays interest that is exempt from federal taxation? -
....ANSWER ...-Municipal bonds
The relationship between maturity and yield to maturity is called the
__________________. - ....ANSWER ...-term structure
Duration is - ....ANSWER ...-the weighted average time to maturity of the bond's
cash flows.
A security has an expected return less than its required return. This security is -
....ANSWER ...-selling for more than its PV.
A 10-year annual payment corporate coupon bond has an expected return of 11 percent
and a required return of 10 percent. The bond's market price is - ....ANSWER ...-
less than its PV.
Convexity arises because - ....ANSWER ...-present values are a nonlinear function
of interest rates.
The duration of a 180-day T-Bill is (in years) - ....ANSWER ...-0.493.
…FOR STUDENTS ONLY…©️2025 ALL RIGHTS RESERVED… 4
